Market Equilibrium or Interaction between Demand and Supply

 

Demand and supply are market forces. From the interaction between these two market forces, equilibrium price and quantity are determined. The equality between demand and supply gives an equilibrium price. A market is said to be in equilibrium when where is a balance between demand and supply. The quantity demanded and supplied at the equilibrium price is called equilibrium quantity.

The Equilibrium state is shown in the below table. The equilibrium state is achieved when the quantity demand is equal to quantity supply. When the price of the good is 3, there is equilibrium state because quantity demanded and quantity supplied are equal.

Price	Quantity Demand	Quantity Supply	State of Market
5	2	10	D<L (surplus)
4	4	8	D<L (surplus)
3	6	6	D=S (Neutral)
2	8	4	D>S (shortage)
1	10	2	D>S (shortage)

 

In the above diagram, the equilibrium is shown when the demand curve and supply curve intersects at E.